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Wednesday, March 31, 2010

The Alarm Just Went Off

The markets appear to have woken from their slumber

After a few days of basically flat lining, we have some good movement today finally in many places. I do warn people to watch for the one day wonder moves that often surround holidays especially in the currencies. If you are in something and get one big day in your direction on a holiday electronic session or the day after, take the money. I have been burned on this scenario way too many times in the last year. We tend to get false moves on light volume which have been reversed the following day with a very high probability lately. I have had several big one day moves become scratch trades around holidays, don't let it happen to you.

Let's check out how the Dollar looks, I have been wanting to buy a pullback here. First and most importantly, we have a flat lining buy setup shown in the first panel where I have a label of strong uptrend. In these situations when the %R dips into the buy zone, we need to be buyers. It has reached that zone today so far. If we close here, this is a buy signal for tommorrow. Remember, it has to close there, trading intraday in a %R zone means nothing.

Next on the third graph, we can also see the longer term of the two trend oscillators also showing a pullback in an uptrend situation. Of course you could tell that just by looking at the chart, you do not need a fancy oscillator to tell you that. You often see these same oscillators on charts from me. There is no magic to them, the magic is in just appying one approach consistently. I use these over and over and most of my trades look pretty similar. This is not a coincidence. I have things that have an edge in trading, so I just apply them over and over and wait ( although at times impatiently ) for the same setups to show up. I would suggest you do the same. Find an approach you are comfortable with. Learn it's limitations, embrace them, accept them.

Not matter what your approach is some of the trades will lose, deal with it. As long as what you are doing is based on sound fundamental concepts, and has demonstrated that over a large sample size an advantage in the marketplace, then just go with it. Use it over and over. Do not get discouraged by the losses. It is known going in there will be some. Last month I started off gangbusters, then hit a stretch of a few losses that took back about 35% of my gain. I did not get discouraged. I waited for the next group of setups to show up. When they did I placed the orders and had a homerun month. I did not get discouraged by a few losses mid month. I know my approach has an edge, so I just waited for the next setups to develop and applied my techniques when they did.

Too many people, myself included in my early days, constantly chase the holy grail in trading. I have news for you, there is not one. You will do yourself way more harm shifting from one approach to another looking for that perfect technique, than you would from even taking a marginal approach and perfecting it. To be clear some searching needs to be done to arrive at your ultimate technique. You need to match your personality to your approach or you will fail. However, once you have done that, stay with it through thick and thin.

Tuesday, March 30, 2010

Have You Missed the Train?

As we watch one of the greatest rallies of all time continue to sail along, what do you do if you have missed it? This is actually an easy answer. NOTHING!

Now that the buy and holders are out talking about how you have to be in it for the long term, yada yada yada, keep your wits about you. People from this school of thought cite what happens to your long term returns if you miss the 10 biggest days, therefore you always have to be fully invested. What they neglect to mention is the far more profound effect missing the 10 biggest down days would have on your returns. Without repeating what I have stated in newsletters in the past word for word, suffice it to say that if you could have managed to dodge the 10 biggest declines it has a far more beneficial effect than the negative effect of missing the 10 biggest up days.

It is impossible to catch all 10 of the biggest up days and dodge all 10 of the down days and vice versa. I state all this for one reason, there is alot of BS out there that serves only to ehance money managers incomes and not necessarily your personal returns. They benefit from having your money fully invested at all times, no wonder they think it is such a great idea. As we look at the above Weekly SP 500 chart obviously had you known in advance that this type of move was going to happen, going all in at the low would have been a great move.

I was bullish if you go back and read posts from the last couple of weeks of February from last year, so I did have the low pegged. However, I too have missed a great deal of this upward move. In fact as hard as it seems to believe, I have actually made money shorting this move. I have had 3 good batches of individual stock shorts that I have highlighted in here at the time I did them, where I made a good bit of daniero during these little retracement moves. I have not made much on the long side I am ashamed to admit but it does not bother me in the least bit. Why?

You have to define how it is that you trade or invest your money, there are many different approaches that can be used. You also have to identify your time frame, this is critically important. You cannot be a jack of all trades in this business. The reason that cannot be done is that when you cross timeframes, what looks really bearish in one time frame can be very bullish in another. If you constantly jump back and forth you will undoubtedly be wrongway feldman and miss move after move. I do not care who you are, nobody is going to catch every move, NOBODY!

Assuming you accept the previous premise, it should be no problem if you have missed this move. You should be looking for what you will do next, or at another market that might be setup to make a nice move. After all the move is long since gone and now you are buying right into major long term resistance between here and 1235. We could also sail right through there with no problem and go right into new all time highs. Am I predicting that, NO. The point is that who knows when and where this move will end. These running markets can just creep along for very long periods of time.

I have highlighted 2 buy spots on the chart and have to admit I only played one of them, the first one. I did not do the second one due to the divergence in the accumulation/distribution oscillators at the top of the chart. You can see how they were diverging on the decline into the second red arrow. As a result I did not do that. Do I wish I had? NO. I follow rules and I have found when that type of situation exists the probability of the trade working are greatly diminished. I pass on them with no regrets. Also, you can see at the bottom of the screen that the trend indicator has been diverging for a very long time, very misleading. This does not happen often with this indicator.

Net net, this has been a very strange rally in so many ways. I have asserted here that I believe it is being manipulated by our good friends at the PPT. Whether that is happening or not, the fact is that internally this has not had what typical bull markets have, so do not feel too bad if you have missed it. Rest assured that the people that have ridden this are likely to ride it back down without getting out. If your long time horizon is to just hold stocks forever, you never should have exited and never should again. I do not subscribe to that approach, I am a short term trader.

My short term approaches have not given me the buy patterns I would have hoped for during a move this big upward, but so be it. Other markets have given me my signals and I have profited every month but 2 of the last 12. Be comfortable with your own approach and do not look back. Learn from the mistakes you make, but don't dwell on them. I tend to dwell on them for about a day, then move on. I want to learn from them, but not let them drag me down. If you have missed this, get over it and determine what you will do next.

Monday, March 29, 2010

WISH LIST

Here is a snapshot of the Russell 2000 which in my view from a very short term standpoint, is the weakest of the three major stock indexes. Of course weak is a relative term as all three of them are in very strong uptrends. I say it is the weakest relative to the others because on the last small retracement it declined more than the others. Also the momentum oscillators are diverging more here than they are in the Naz and SP.

What this means is that if I short the indexes here for a quick move down, this is where I will play. The fact that we had an inside bar followed by an outside bar followed by a reversal bar up, tells me we are at a short term indecision point here. A very small breakout type of situation. My wish list has on it the following. First a move up the next day or two. Second, that move makes a new high with the accum/distribution oscillators not doing so. Third, if the second does not happen, then a move up that fails the high and keeps the GOOD DOWNDTREND situation with momenum oscillator number 2 at the bottom still intact as a downtrend.

Due to the quarterly ending period here, I think we will maintain strength the next few days. We all know that the window dressing "rules" discourage these markups at month ends. However it does not seem to stop them. In addition, the PPT hardly follows any rules. The F... you I won campaign with the government is in full effect even for blind folks now, so there is no reason why they won't give this a friendly nudge with a futures buy program or two if it needs help.

One comment I want to make as to why I have taken the last few days off this month from trading. I try and run my trading business just like any other business. By that I mean setting goals and trying to knock them down one at a time. This business is like no other, so we can not always fit things nicely into a clean little business plan. However, just blindly sailing along with no business sense of what you are doing also makes no sense at all. One of my main goals with to on average double all of my accounts this year. Of course some will go up more than others, but I am talking about just across the board on average get a 100% return. If I am able to do that it will be a good amount of money in total income. I am hesitant to state the exact number just because you never know who is reading what on the internet nowadays. As a result it is best I keep that to myself. For all I know Barry's thugs would come after me if it was an amount they thought someone else other than me might be more deserving of. When I had this recent run it got me back ahead of that plan in a few accounts where I had been behind schedule, so I felt it was a good business decision to end the first quarter ahead of schedule and pat myself on the back.

It is easy to get carried away with yourself when you have good runs in the market. For me, for whatever reason, when I am up big in the middle of months I tend to get sloppy and give some back towards month ends. I am one of the most disciplined people any of you would ever meet, so this makes absolutely no sense at all. Yet, it happens time and time again. As a result, this month I decided to kick back after my big equity run and just monitor what I would have done. Sure enough a couple of the trades I would have likely done would have lost, and I would have given a little back once again.

This does not seem to happen when I am having a lousy month, I tend to be able to save them at the end. I know this makes no sense at all, but it is what it is. Until I can figure out why I have these tendencies, this is how I am going to play it and for this month it has saved me from giving back about 5k of the profits. So far so good. Anyway, what you get from me is what I am thinking at the time I do these posts, so here it is.

Saturday, March 27, 2010

WEEKEND REVIEW

My life is so hectic during the week that I love the weekends since they give me time to catch up on the larger picture of what is going on across the board. Let's see how things look.

The stock market is sailing merrily along and aside from short term things I have mentioned in the past week which are good for only quick in and out trades, I see nothing alarming here that tells me a major peak is near. There is net commercial selling but this type of activity is meaningless. The traditional seasonal peak time period begins in May, so that might be a time to look for something in the way of a reversal. We can argue all we want about whether this should or should not be happening, but the bottom line is this is a rock and roll major trend move up. Fighting trends like this is not wise. This is just creeping along slowly and steadily. These are the hardest moves of all to time reversals in from my experience. The key level of 1040 is now established so nothing bad happens until price gets below that. I have stated I think 1235 is a layup and have not changed my mind on that. There is nothing that says we will stop there if that level is reached. That price zone is the .618 retracement of the whole down move, and these levels often become self fulfilling prophecies.

There is no doubt that what Chairman Barry is doing here will at some point completely wreck the economy and the stock market, but it may take some time. As I have mentioned earlier, shifts to communism and socialism have not immediately wrecked other countries stock markets, so there is not a precedent for saying that this obvious shift will do that here either. I am looking from a short term perspective to trade the short side here but just looking for a minor correction.

Here we have the dollar weekly chart and the uptrend is evident. What is also evident is again how the COT data would have led people astray here. First we have 2 instances of huge increases in Small Spec longs which should be bearish. In each of these instances the market has exploded higher. We also have a record net short position by Commercials which again has been worthless to know. We also saw this same situation in GOLD during it's runup. It did eventually foretell of a major top but took so long that I would call it worthless as a timing indicator. I am looking to get long on a pullback in this market, we have a lot of upside left here.

With the Dollar being bullish you would think Gold would be bearish. However, we are in a weekly buy zone right here. Price has found it's way right into a strong support zone. If it holds here we could see a very nice move upward and the Gold bugs will be dancing in the streets. However, if we do not hold this level I do think a huge collapse will happen here. I still for the life of me cannot understand the logic of buying something because it has already risen 300%. The summary then is that we are at a key inflection point here and I think a large move in either direction could happen. You could say well what the hell good is that you can then come back and say I told you so either way.

Anyone who reads here regularly knows I never do that and rarely make a call like this where we could break out in either direction. I will not do that here, I do not have a strong view on direction in this market right now. My calls along time ago for a monster decline in this market were based on COT data that I think was manipulated. There has to be a reason out of the norm why that data has become worthless after being great for so long. I do not know what that reason is I just know that it is no longer of much value in predicting market price movement. I am not one to stick to a view on something forever stubbornly. I do feel the whole premise for a huge upmove in Gold is bogus, but I trade price and we are in a zone where we could move higher. As a result I will take short term trades in either direction here.

The Euro is pretty self explanatory, major downtrend sell rallies. We do have again huge commercial longs at record levels and similar record shorts with small specs. However, we have no sign yet of a trend change.

Crude Oil is an interesting situation. We have a sideways market with rising Open Interest, generally a bearish situation. We also have a good amount of commercial selling now that we have risen back up to the top of the trading range. This is a situation where generally the COT data should still be of help. Let's see if it holds true here. My view of this as a result of this is that I am looking for lower prices in the energy markets. I have traded the short side of Heating Oil this month and caught a nice 700 point down move there within the last week.

Thursday, March 25, 2010

SUGAR NOT ALWAYS BAD FOR YOU

Anyone who knows me personally knows I am a fitness and nutrition nut, so as a result I try to avoid Sugar at all cost. However, here is an example where Sugar could be good for you. The above daily chart of Sugar shows a very strong downtrend, yet on the weekly it still could be a pullback in an uptrend. We have some divergences showing up in the accumulation/distribution and momentum oscillators. We also have a reversal bar down today. If tommorrow the high of this reversal bar were to be taken out, it would be a valid long entry. The more conservative play here is to wait for a move up then a test of the low that holds or takes it out and immediately reverses.

If you were to take that route and wait you do avoid the risk of this just continuing to cascade downwards. This is what I call a running market meaning it has almost no pullbacks at all, more or less the inverse of what the stock market looks like right now. This risk of waiting for the retest is that at times like last March in stocks, you do not get one and the market is off to the races without you. There is no perfect answer to this and it boils down to how aggressive of a trader you are. I generally start swinging at these knowing I may take a loss or two before catching it. I do not like it and always hope for the best and at times do catch almost the exact low or high when the markets reverse.

If you take that route of being aggressive it is imperative that you have the mindset that as long as the setup is in place you keep taking the trades. If you get discouraged after a loss or two and walk away, invariably you will pass on the trade that makes it all back and more. You must have a plan and stay diligent in this business. This is also where money management comes in. If you risk 2% per trade you would only be down 4% if you happened to lose twice before catching the big win where the market reverses, that makes you 10%. You cannot afford to miss that move if you trade reversals.

I tend to trade both reversals and continuations of trends, so I do not get hung up on trying to classify myself as a particular type of trader. I just look for opportunities where my tools tell me to go and this would be one of them. I do wish the weekly was a bit better of a setup than it is. If it were I would be more aggressive with this one. Who knows we could just go straight down and never trade above today's high and the order would never be filled anyway. However, it is amazing how often when you see a reversal bar like this, that the high does get taken out the next day.

As I post this I have not decided if I am going to take this trade or not. It is a setup that I wanted to point out for readers here just in case it might line up with something they might use for triggers.

The stock market had a very interesting day today, trading up quite a bit and then reversing back down. We now have an inside bar with down close followed by an outside bar with a down close. So we really have 2 consecutive down closes in the futures indexes, which could almost be argued in this zainy move to be a pullback. My indicators say this could move down some but I don't like this bar pattern so I am going to sit on my hands here. I do think in general a pullback of some minor amount is coming followed by a move up into the 1235 zone for the SP 500. Once we get to that 1235 we will see what happens. That is the .618 to the all time high area, and a zone that alot of big money people have been waiting for during this whole move upward. It is possible we could start a big move down from there, but it is certainly too soon to make that type of call.

Wednesday, March 24, 2010

TO FADE OR NOT TO FADE, THAT IS THE QUESTION?

I don't know what it is about the human psyche, but so many of us always want to sell whats high and buy what is low. After all isn't that the old adage? Well you can really get into some trouble in the trading and investment world at times by doing exactly that. Shorting strong uptrends and buying strong downtrends can be very dangerous as we have seen in some very extreme trends in the last 2 years. Your timing better be good and your pockets big to be a trend fader. Every month there is a new gimmick about how to time the market better.

Make no mistake about it, timing techniques for determining trend changes are at best hit and miss. You may catch a few, but you also will get your pockets drained in the process of catching those few. I speak from experience here. The 2 most frustrating trading years I had were back in the mid 90's trying to implement techniques such as this. Fibonacci, reversal bars, Gann, all that crap that does not work. One of the best quotes I have ever heard was "If you draw enough lines on a chart something will happen at one of them." This is so true. One look at a Gann chart and I feel like Christopher Columbus looking at a map on his ship.

The Russell 2000 chart above is an example of a trend that has been tough to fade recently. Last week I posted about a shorting opportunity which I did take. It was only a very good judgement on my part on the gap down opening following the one big down day, that allowed me to sneak away with some money. That was the only pullback at all of any kind for quite awhile here. Even though I was able to time that, overall I would have to say that trade was lousy. Just look at this chart, is it really a market you want to have been trying to short? Obviously not.

There are once again a couple of things that are saying we could short this market here. We have some divergence in the Pro Go Indicator, and one of the momentum oscillators is also indicating a down trend. However, the longer term momentum indicator shows an uptrend which of course we can see just from looking at the chart of the price. We hardly need anything fancy to see that.

As a short term trader for the most part, I am tempted by what we see above except the one thing I do not like about it is the inside bar with a down close. In certain instances they are good setup bars, and you have tight stops for the entries. However, with a trend this strong, I just want a bit more than this to short this market. It certainly is not a buy for me here under any circumstance even though I do expect this rally to continue for awhile. We are extremely extended on a short term basis, so a sharp correction is coming. Sharp nowadays could just be a couple of weeks or less, this is one of the strongest trends I have ever seen in stocks.

This post is more of a thinking out loud, inner monologue for me. I have alot of the casino's money in the bank this month, so I am going to be very picky about entries for the balance of the month. There are several individual stocks that are setting up short entries, so I do believe we are close to a minor peak here. I urge you caution in equating politics to the markets. Alot of the negative things that are going on will not effect the markets on a short term basis. The long term effects I think we all know, but until we get something telling us the trend has changed be careful about big short positions. If and when this trend changes it will be obvious, if we miss the peak we can enter on the first retracement. Some of the commodity markets are developing sideways trading ranges, so we may correct by moving sideways here.

Another good month is close at hand, so I would expect fund managers to try and hold this up with all they got, especially with it also being a quarterly ending period as well.

Here we have the Dollar Index and the UUP of course is the ETF for it. Aside from any brain surgeon's arcane economic theory about the impending death of the dollar, does this look like something that is crashing?

Honestly folks I have been harping on this for so long and at least readers of this blog have been told this was going to happen. Those who have been fortunate enough to find my blog which is not advertised in any way shape or form, have not been caught by surprise here. I did state in here just about a week ago that I was looking for a large upward move here, and viola here it is. This is just another example of why you need to learn how to trade. You cannot invest your money based on these macroeconomic theories. Why do you think most economists don't trade or invest well? After all aren't they all supposed to be more intelligent than the rest of us? They have all their degrees from fancy institutions.

Here is why they are wrong all the time, they are paper champions. What that means is they are textbook smart but not real world smart. There is a huge difference between these two things. Tom Brady looked bad at the combine when he was drafted in the 6th round by the Patriots and Ryan Leaf looked good. I think we all know how that turned out. Macroeconomic theories are based on so many assumptions in a completely random world. I would go as far as saying these theories themselves are arrogant in some ways. It is arrogant to assume that things will happen exactly as you think they should in the future. The nimbleness you can maintain as a trader just by watching what is actually happening is invaluable. You do not get stuck in a view.

Chairman Barry's plan being the communist that he seems to be rolling along just as advertised. So many people think this conversion to socialism and all this spending have to lead to huge inflation. If you study other countries and when they have converted to socialism what you will find is kind of flat markets. Everything is controlled so to me it makes sense. All these geniuses will come out and tell us why things should crash because of that but from my research I have not found that to be the case. Again, real world occurences vs textbook theory. If they can manage to steal enough from people like me without having any further fallout, they may be able to keep things relatively flat for quite awhile.

The good news is that the deoupling of the dollar and stock market inverse relationship is happening, and that is good for trading.

In any event, if you push back from the table a bit and just keep things a little simpler, we have a nice uptrend going here now so in general buy the dips in the dollar and short rallies in commodities.

Tuesday, March 23, 2010

LETS CHECK IN ON OUR FRIENDS OVERSEAS

I stumbled across my good friend Joe Battaghlia on the radio again yesterday afer not having heard him for several months. I have to give it to this kid he is consistent. He would tell you if the Lakers did not beat the spread against the Timberwolves, that would be a reason why the dollar would decline and Gold would rise. Of course he works for a company that sells coins, so of course he is a GOLD bull and dollar bear. Once again he was touting the pending dollar collapse which ironically you do not hear as much talk of lately.

Of course people like me did give you a heads up of a dollar rally in advance where he makes no commissions in those types of events, so it would be unlikely a decline in GOLD and rally of the dollar, would be called by a coin salesman.

Above is the chart of the EURO and we have some conflicting signals. First we have in the bottom pane a very dominant downtrend that is evident. This Flat Lining situation that Larry Williams teaches is something not to be ignored, and was the main reason when playing a couple of longs a few weeks back when we made that little bounce, that I pulled the ejection handle quickly taking small profits. In situations like this you just sell every rally until it subsides. Now at this point we also have the momentum oscillators both in downtrends indicated by the red arrows. This supports that the longer measure Flat Lining sell situation. There are a couple of things leaning the other way. First, the purple line. This is Larry Williams POIV and it is diverging positively. When this diverges I have learned to pay attention, it is does not diverge nearly as much as most accumulation/distribution indicators, when it does moves normally occur.

We do also have huge Commercial buying going on here, but as I have mentioned recently, the COT stuff does not mean much anymore except in special circumstances. The patterns in that data are so erratic now that I really do not think they are worth anything at all. Sometimes they are heavy sellers in downtrends, sometimes heavy buyers. In one case their buying confirms a trend and in another it confirms it by them being inversely positioned. Their is just no consistency at all with this stuff anymore, and I have had my fill of brain damage and equity damage by relying heavily on it.

You can see on the following weekly chart, that the Commercials were consistent sellers during last years big uptrend and consistent buyers during the current downtrend. Wrongway feldman is the best way to describe that track record. The one thing I have highlighted which might be significant, is the heavy short position currently in place with the Small Specs in green. If you look at the last time this happened a major low was formed. This bears close watching but for now the trend is down, the momentum oscillators are down, and the longer term momentum is down. As a result, I do not expect a rally here anytime soon. We do have mixed signals here, so I do not see a trade either way for me in the next week here.

Monday, March 22, 2010

RING THE REGISTER

Last year I was repeatedly burned by holding on to trades for a day too long trying to get to price targets. I vowed this year not to make that same mistake. This morning as I arose to the largest 2 day gain I have ever had, I decided to do the Cash Register Exit and stick to my plan when last night I was thinking about holding another day across the board. This basically means exit everything at once and take the money. I am going to hold the VXX long which bets on a volatility increase and just carry a stop below on that and see what happens.

The main reason I have done this is that alot of my trades although just gangbusters on the charts, are against the big trend which is decidely up. I do have some short term indications of a pullback, but nothing bigger picture indicating a top. As a result I am being a bit more nimble exiting here. The Gap down in the Russell 2000 which is the futures index I was short was ripe for a reversal back up. Gaps down in uptrends are generally buys. At some point one comes along that is not and that is typically a trend change. On those days we just gap down and keep going. There is no way I have been able to find to determine when a gap will reverse and when it will not.

The PPT factor also has to be considered. There is no way the government wants a big down day in the aftermath of the hickjacking they just committed. They want to be able to continue that insulting arguement that this "reform" will actually save us money. A stock market wipeout does not fit into that logic, so I would expect them to be aggressive futures buyers if need be today. Some of what I just mentioned is really noise and quite subjective. The main reason I took the money was what I stated at the beginning above. One thing to stress though, in spite of all this logic just layed out, the one rule on exits I never violate is this. I never exit at the market taking profits on anything unless I have greater than a 1 to 1 ratio of profit vs risk. If I risk $1k I never take profits at less than $1k etc. There are trades that might get stopped out for a different ratio than that and that happens often. However when taking profits I keep this ratio so that way I know I do not have to have a 70% win ratio to make money. All of these trades moved enough to exceed this ratio and many exceeded a 2 to 1 ratio.

Too many people just randomnly take money and determine position size, without any money management thoughts. That is why so many people do not ever get anywhere doing this. I was talking with someone recently who said they don't like trading Corn anymore because it never goes anywhere! He was just taking the same number of contracts in that as he was in Soybeans. Well obviously you take more contracts in something where your risk is $500 per than you do in something that it is a $1000 per contract. That logic just blows me away when I run into it. When I trade the grains the risk is the same on every trade, 2% of my account. I just take more contracts for markets that move less. This is so obvious that I cannot believe anyone would not know to do this.

Here I exited my short on the gap down opening, and we have already reversed it intraday. The price is already $500 per contract higher than where I got out. I do expect to see some more selling later in the day so I do not think this will hold here, but I am out and don't care. I am hoping for a day or two up and a high failure for another short entry.

Here is the Oil ETF short I did, that matched up with my short in Heating Oil. Of course this is a long trade because it is an inverse ETF. Again, the big gap up open in a downtrend. The Oil market is setup for a fall I think but again the Cash Register exit. The other thing that is a bit tricky with matching up ETF trades with futures is that the futures markets are open more hours so you can get burned giving back profit or taking a bigger loss vs a futures trade in the same market. This has happened to me before where I got stopped out of a futures trade at 4 am, then had to wait to exit the ETF trade and lost a bit more by the time it opened. Oh well, it is not a perfect world. These vehicles are just terriffic overall.

Here is the Silver trade, again a very short term trade just being in for two days and then an overnight session. The metals are drifting into a support zone so I was overly careful on this one. I probably should have held this, but Gold is right in a weekly support area so I just was not sure how much room I should give this one.

I have just highlighted a few of the trades I did, in all I was short 3 futures markets and 8 stocks/ETF's, all 11 trades were winners, and all very significant winners due to having some size on them.

Saturday, March 20, 2010

BENEATH THE SURFACE

The Dow Jones Average is sailing merrily along here but yesterday some internal damage was done even though at the close we did not have much of a down reading for the day. I will show you that in a minute. We do have something developing that I have mentioned in the past, the 5 point Megaphone pattern. This has been written about by Kevin Haggerty in recent years, but way before that in the Edwards and Magee book whose name escapes me. Essentially it is a broadening pattern that often signals reversal points in the markets.

This pattern is nowhere near accurate enough to just trade by itself. However it has been present at some very notable major tops and bottoms in the markets, march 2000 to name one that most of you might be familiar with. It is also accompanied by some divergence in the Larry Williams Pro Go indicator. There is not so much divergence here that I would give it huge weight where I have the lines drawn. However if you look back several more months just past where I have the 1 on the chart, you will see we are still below those levels in the Pro Go ( Green Line ) with price being a good bit higher now.

I point these things out just to give some justification for the comments I made at the top. This does not mean go out and just sell, but as you will see, some of the shorts I put on the last couple days are doing quite well indicating that underneath the surface things might be weakening a bit. This weekends health care action could cause a big day one way or the other on Monday. I am kind of hoping they do the hidden card trick and pass it without a vote then the Repubs and states file lawsuits, and it gets over turned that way. That would be such a monstrous embarassment that I think we would pretty much be rid of Barry, and things could improve. As long as he is at the helm, the economic state of this country is only going to deteriorate. So that is a precursor to the next trading day, it is literally a historic weekend in so many ways that the market could be dramatically effected for one day on Monday. The following are just some charts on some of the trade I have done in the last couple of days. The Tradestation arrows show where this trade was entered and many stock charts do actually look like this.

If you go back to my comments over last weekend about the Dollar and how I thought it was setting up for a big move up, you can see that it may have begun. I had felt that 79.50 area was a good low support point and we went to 79.73 so close enough. I used this as a supporting tool to short a few other things that I will show in a minute, Silver and Heating Oil. Since I suspected a bounce here I thought I should look to the short side in commodities.

I have been laying in wait for another short side opportunity for the metals, so when I saw the dollar dip into a zone that I felt would provide support I started looking for patterns in the metals for short entries.

Here as I have written on the chart, I shorted below the low of the high day here, being mindful that we had a good trendline right there that was close to breaking and the dollar which moves inversely, was likely to move up. So far so good I guess. Also one of the great innovations for trades in recent years is ETF's. Here we have the ZSL that we can trade in IRA accounts, that is the equivalent of shorting the futures. Since it is an inverse ETF we can buy it and bet on Silver declining. I bought 10,000 shares of this as you can see on the chart.

I did alot of other trades including the VXX trade I mentioned and Heating Oil, and several others as well. The last one I am showing is my Russell short trade. Since I had been saying the 2 days prior to this that I felt we were due for a short term correction, I was actively looking for entries in the indexes. I felt the Russell was the best setup, so that is where I went. I also played the ETF equivalent of the Russell Short, RWM.

I have shown alot more charts than I normally do here and there is a reason for this. Often we go through the grind of trading each day and looking for what we think are the best ways to make money. Many days I find myself forcing the action, and I have learned to catch myself when I am in that mode and not piss away money on a bunch of marginal trades. I still make my share of blunders to be sure, but when I see things setup across the board in a way that I think correlates as well as all of this did, I do try and be aggressive with entries. After all, I do not spend all this time studying, analyzing ad nauseum, just to sit by when things are ready to move. You have to take advantage of the opportunities when they are there and try and not give too much of it back screwing around when they are not.

This day could be what I call a one day wonder, where everything is just gangbusters in your direction. This is what stops are for. This weekend is one of those unusual times, where politics could really effect the markets directly in one day come Monday. I am not counting my chickens yet, nowhere near it. This could all reverse with a huge up day if health care does not pass. If it does I think it will put some downward pressure on things overall. I do not know if it will be in just one day or not.

My parting thought is this, If you actually believe this healthcare bill will reduce the deficit, do not trade stocks or futures or any other financial market. Although you do not have to be a genius to trade well, you have to have some semblance of intelligence to do this.

Friday, March 19, 2010

STILL THE ONE

I have to be brief today due to time constraints. The above chart of the VXX still has a buy setup I have been stalking now for 3 days in place. This setup is even better now due to it being a possible trap breakdown and reverse if it were to trigger today. We are fighting a monster uptrend in stocks here, so maybe this will just keep going down and never trade up above a prior days high until the setup is negated. This is why I always enter above highs and lows instead of at the market. The setup needs short term strength to be validated.

Remember, this is a buy in the VIX which is buying volatility. This is not the same as buying stocks. It is more often than not the reverse. Usually we get volatility increases on stock declines not rallies. I do think we are headed straight for 1235 in the SP 500 at the least, and the trend on all time frames is up. As I have stated over and over, there is no reason to blindly short the market as a whole during a blow off move like this. I do think in the very short term a pullback is way overdue now and I am trying to play one. However, I trade on breaks and rallies and my orders on the indexes on the short side have not been filled yet.

I do have them resting again today below current levels, and I did get short a few individual stocks yesterday, but do not just short the SP 500 at the market without some type of trigger to get you in.

Can't wait for the IRS to be in charge of health care - for those of you who might have read any of the bill, that is what is about to happen

Wednesday, March 17, 2010

Time for a SWING!!!!

This is a daily chart of the Russell 2000 with Standard Deviation bands overlayed. I have used the 90 day and 2 Standard Deviation pattern settings. There is no magic to that, you can use different time periods and different deviations. The whole general idea is that is measures moves that are extended and due for a reversion to the mean. In this case you can see where we have touched the bands on the high side, in every instance we have had a short term pullback. Some have been large moves and some small, but all of them have had them. There were a couple of instances where once we hit them we kept going for a short time similar to what we have now. Even in those cases we did have dips after a few days past the bands like we have now.

In my world when I combine this with the VIX sell pattern for stocks that is still there that I posted a few days ago, this tells me it is now time to try and counter trend trade this market. I sell on breaks and buy rallies once my setups are in place, so in this case I will be looking to short a break if it occurs now starting tommorrow. There seem to be sell signals in several markets for tommorrow if we go down, so it is confirmed to me that we are in a short term overbought zone.

I doubt we are done with this upward move overall, but the one thing that is always lurking in these light volume moves, is the possible heavy volume down move that catches the PPT by surprise. Recently we have seen one about a month ago, but they were able to contain it pretty easily. Although there is very little correlation day in day out between volume and price, history has shown that upward moves like this on light volume have not lasted in general.

In all honesty fading this move as many have done would have been a disaster, and I have not done it yet. I do think now is the time to take a shot at it knowing that it is probably not a really high probability trade. However, I do have a new pattern I am starting to use that is in place now for a decline if the market breaks here. Since I have not used it much in live trading, I am anxious to see how it holds up in real time.

I will post the trade here in the Russell if I get filled, I have the orders working right now.

Now that we are in the midst of a runaway bull market in stocks, I thought I would review a couple of ways you can trade these types of blowoffs

This chart is Cotton but shows the same type of market characteristics that the SP500 and all the other indexes do right now. We are climbing very sharply with virtually no pullbacks at all. I have marked off 3 different buy spots on this chart.

The first one is the dreaded Reversal Bar. This is basically a bar that trades above yesterdays high then closes below the prior days close. Much has been written about waiting for these bars then trading against the trend when they show up. This does not work, and any book you read hyping this you should immediately put back on the shelf at the book store. The best way to trade them is to buy above their highs the next day if they get taken out. This first entry shows that and worked quite well.

The second entry is just a decent one bar pullback. The entry would just be above the high of that bar. These are very difficult trades to take when they show up because after seeing a sharp rise, we always think it will retrace more. The best trends do not retrace much. Here you can see the liftoff we had after just one bar down.

The third entry is basically what is referred to in Candlestick charting as a doji bar. This is basically a bar that closes very close to it's opening. These indicate indecision, so a breakout of these bars is often a short term momentum burst. Larry Williams calls these blast off bars. You can call them whatever you want, they do work nicely in situations like this. Breakout from these indecision bars work quite well in the direction of trends.

So there you have 3 possible ways of trading these sharp up moves like we are seeing right now in stocks. Do they always work? Of course not. Trading is a probabilities game and when in the midst of a strong trend move and you see one of these three situations develop, the odds will be on your side for a trend continuation, and that is all we can ask for.

A little housekeeping. I had mentioned during the down day here due to a power failure, that I had shorted Crude and a few stocks. The Crude trade wound up as a scratch after having a gangbusters first day, then sharply reversing and going back up again the next day taking me out where I entered. My stock orders have not been filled on the short side yet. I sell below the market and we just have had no dips in all of the individual stocks I had orders in for.

Tuesday, March 16, 2010

This is a line from my favorite movie Trading Places from the very end after they got over on the Duke brothers and were on the desert island celebrating. It also applies to the setup below.

I am looking for a long entry in the VXX which is the stock proxy for the VIX futures. This setup here is why I am doing so. It is the same chart I posted this past weekend with another day having gone by. Breakouts up and out of here where I have marked with the red arrow and the b should be taken. We have confirmed momentum uptrends and are right at the standard deviation bands I use. Of course the one negative is the major bull market we are in, and this is a counter trend trade. We only see stock markets this strong every so often, so you must be careful swimming against the tide as I stated over the weekend. It certainly appears we are going straight to at the very least 1235 in the SP 500, which is the .618 retracement to the all time highs.

Who is to say we stop there, when you get a running market with momentum like this it is just impossible to pick a stopping point. This is one of the main reasons why I sell below the market and buy above it. This way I at least have the short term momentum moving in my direction when I get pulled in. This has kept me out of trouble time and time again when my market direction has either been wrong or early. There is no perfect approach, at times this still gets you into lousy trades going against the trend. Of course all losing trades look bad or dumb after the fact.

One thing to be mindful of with the above setup is that one of the best ways that has evolved to use the VIX is to follow it's trend. In the "old" days, people used absolute levels in the VIX and those are worthless nowadays. The VIX is trending down now which is supportive of a stock uptrend. This is why I have harped to wait for confirmation for any trend reversal trading. Confirmation can be many things depending on your trading style. For me I like using momentum oscillators for early warning, the breaking of certain levels in price as my triggers. There is no panacea here you just have to use whatever works for you.

The one thing I would recommend against is using what is comfortable. Comfortable usually does not work in trading for too long. We always gravitate to things to make us comfortable because there is a self reinforcing mechanism in the human psyche that tells us we are protected from harm when we do this. At times that may be true, but I would assert that you need to be out of your comfort zone to be successful. Just cruising along is a fine way to live life, but it will not enable you to excel beyond others.

Sometimes I feel like an idiot for looking for these couter trend moves when the market just keeps marching along. However, that feeling lasts for a brief second. I stick to my approach come hell or high water. I do not want to be doing what everyone else is, even if at times I get beat up a bit. I know in the long run that following the herd will ultimately lead you to the slaughter. This above trade if we get some short term strength is a setup that has worked for me over and over if not on every trade. When we get these I take them and do not look back. I use stops to manage risk, and off I go.

Monday, March 15, 2010

OFF THE GRID

Due to a power outage my main computer was fried last night and all of my programs I need to post things here with charts are off line. Hopefully the GEEK squad can fix it today so that we can get back to business as usual Tuesday.

I am short Crude Oil from Friday and also shorted a few stocks this am and am trying to get long the VIX here if we break out upwards.

Saturday, March 13, 2010

BUSINESS AS USUAL

Our light volume government sponsored rally has resumed, all is good again. I will lay out the case for a peak occuring right about now but until there is confirmation of a trend change, THERE IS ABSOLUTELY NO REASON AT ALL TO SHORT THIS MARKET JUST BLINDLY HERE. Lets look at some charts and delve into why it is possible for this to come to an end here. I want to first make it perfectly clear that I have not done a short trade in stocks in the last few weeks, and won't likely do so until I see some of the patterns I use show up tying into some of these other things I will discuss below. You have to be careful with these low volume creeping markets, they can just grind you to a pulp if you try and fade them blindly.

Here once again is the weekly SP 500 chart with the Bradley Model and Larry Williams Will Go as well as the net cot positions. I also have the cycles that have been the most dominant in price marked with vertical blue lines. You can see we are right at one of these, with the Will Go indicating down, right at a time when the Bradley model also is indicating a peak. The mid panel which shows commercials does indicate selling but not an overly bearish amount. As I have discussed in here recently, the COT data has been essentially worthless in recent years with this market. As a result that has very little meaning to me, it is just on this chart already and I did not feel like deleting it just to post it here.

As a result, we do have some things going on here that indicate we could see a possible peak here. Let's go now to the VIX to see what this adds to this.

This is about as good of a buy setup as we can have for the Vix which would be a sell for stocks. We have the momentum oscillators all indicating an uptrend with price falling, so a divergence. We have a potential higher short term low in the Vix itself and RSI approaching the buy zone. Buys in the Vix are sells for stocks.

This is a short term setup good for 3 - 10 days generally. I will be looking to play this on Monday in some form via futures, stocks or a few other things. Next is what I consider the payoff pitch here. Look at what a beautiful buy setup we have for the US Dollar right here on the weekly chart. As I have mentioned in here, stocks and the dollar are trading inversely mostly due to the carry trade. However, historically the DX has generally positively correlated with US stock prices. It would not be normal to look for a Dollar buy signal to confirm as stock sell signal. I think most of you must have noticed, things are not normal right now. We need to be mindful of what is currently happening, not what should. All you Gold buffs know I repeat this over and over. Theories about what should happen are one thing, but life is not always predictable. We have to be aware of what is currently correlating and be mindful of it until it no longer is happening.

As much as I want all these ridiculous correlations that are in place to get lost, they are still here and although have shown some signs at times of decoupling, the trend is still for them to remain in place. Following that logic, a Dollar buy signal at this moment would be bearish for stocks even though historically that would not have been the case.

So if you look at everything collectively, we do seem to have several things lined up for a stock market decline. We have a big uptrend, so it all depends on your style and time frames you work within, as to what you will do to take advantage of this. I trade short term, so it is time for me to look aggressively for something here. It is also why I took profits in my EURO long yesterday. If I am bullish on the dollar I sure do not want to be long the EURO due to the inverse relationship those two markets have.

Here is the other trade I made this week, due to travel I was not able to post this setup in Coffee, but I am sure you will be able to see how similar it looks to alot of my trades. I don't get creative, I look for the high probability setups I have and trade when they show up. Alot of my trades look the same, so be it. I am not a painter trying to be creative and have each work of art look different. I want them to all look the same and make me money, pretty simple. You can see the momentum oscillators indicating the trend had turned up before price, then we had a huge divergence in the accumulation indicator ( purple line ). Once that setup is in place anywhere, I start working my bar pattern setups for an entry. I exited this trade due to it being the 5th day in it and the market really still being in a downtrend. I did not want to overstay my welcome. It may not look like much, but it did make me a little over $12,000 so not too bad for a few days work. You can see the market did reverse later in the day after I exited, so it appears my exit here was a good one.

Friday, March 12, 2010

WATER COOLER CHATTER

It is time to get back to the world's favorite subject during gatherings by amateur economists around the company water coolers, the US Dollar. I find it interesting just in general how now there seems to be a general buzz that the dollar could strengthen going forward. Some of these people are one in the same who decried the death of the US Dollar last year after it had already been clobberred. If for no other reason, this type of thing should teach you that the majority of these hacks have no idea what they are talking about. You are much better off educating yourself and making your own calls. These same people misread the real estate and stock market crashes, as well as the OIL market implosion. They also said to get long commodities right before they got slaughtered.

So I would pose the following question. "Why should anyone cite the same wrongway feldmans who missed some of the most obvious asset bubbles in history, when supporting an argument that the US Dollar will collapse?" Their shared opinion should make it the gospel?

As I have stated in here many times, I am not an economist. If I were wrong that often I would not be able to support my family. I am a trader and I do not make trading decisions based on arcane theory of one possible future outcome that is linked to a causal effect that should occur in theory after my predicted event occurs. On the surface it is difficult to argue that Barry and the Cosby Kids ( my name for his supporting staff ), are setting us up for the worst economic nightmare of all time. This man is an idiot plain and simple, and at some point in the future this massive inflation that will be an outgrowth of his policies so many are calling for, could very well arrive. However, in the meantime, I still see us as being in a deflationary cycle. I know of few things I consume that are rising in price, most of them are declining, some rapidly. It is my contention that Barry and Bernanke know this and are trying to inflate things to fight it off. A massive deflation wave is not going to be any better than runaway inflation would be.

If you take a look at what is occuring in Europe it just further tells me that the US Dollars international status at the moment is not declining, it is improving. All this talk about the Dollar being taken out as the worlds reserve currency is poppycock. What we are going to have the Yuan take it's place? Please just think logically about some of these statements when you hear them. Now that I have jumped off my pedestal, lets review the chart above.

The DX as you can see has been in a nice uptrend that began in November of last year, right when I was telling everyone to look for a bottom. I was to be fair about a month early, but overall still not a bad call. One of the things that jumps out off this chart to me is the divergences that we had in the accumulation/distribution indicators ( purple and green ). They rarely diverge that much, and when they do we have to pay attention. I did short the DX a few times up there due to that, and the trades were marginal at best, one scratch and one small loss. Now the price is giving way to this pressure and going down. This is why I was long the Euro, just exited this morning. It trades opposite the DX and moves more, so that is why I played there and did not do another short trade here.

However, what we have now is the momentum oscillators approaching levels that were last reached when price was much lower than where it is now, a possible exhaustion move. Also, we are approaching weekly support levels in what has become a weekly uptrend. This tells me to look for a long entry with this dip, and that is also why I took profits in the Euro this morning. I am looking to buy this dip. Below is the Euro trade I made, just a quickie but decent money.

Thursday, March 11, 2010

BACK TO WORK

I am back from my trip and now it is time to get back down to business.

There is something very interesting going on here that I think is quite bullish overall just for trading in general not necessarily in a directional sense. These ludicrous intermarket correlations appear to be finally decoupling. Since these were all an outgrowth of the financial crisis it may mean that things are actually firming up on that front but I really don't care about that in all honesty. It certainly will make trading easier if markets just return to their own fundamentals and not have everything key off stock prices. This development would just open up the potential to be able to trade with more diversity.

It one sense it has been easy because all you have really had to do is trade everything in the direction of the stock market, but it is has messed up leverage. It made every trade basically the same, so managing risk was difficult. I like to trade 4 or 5 things at once risking 2% in each one. This way 5 different markets all have to go against my position at once to have a drawdown of 10%. In the last 2 years you could not do that. If you put on 5 trades you were basically risking 10% in one trade because all the markets were so highly correlated. I will never risk 10% of my account in one trade,EVER!!!

This chart has the SP 500 with Gold, Oil, and the Euro overlayed in respectively different colors as per how I have labeled them. You can see that oil is still sporting a very tight correlation to stock prices, but the Euro and Gold are now diverging significantly. Just in general this tells me the "worry" is coming out of the market. In normal times we would look for selloffs in stocks to occur when the worry is gone, and the VIX generally tells us when that is happening. Let's look there to see.

You can see this still looks basically the same as it did when I posted this a few days back, although it is actually a little better. All of these indicate a sell setup for the stock market, remember buys in the VIX are sells for stocks, they generally move inversely. The buy signals have moved along a bit more in confirming an uptrend, which is a sell for stocks. This is a short term signal, there is no way of knowing if it will work, or if it does will a big or small move happen. You just trail with stops and see where it takes you. One thing to note, failed sell signals can be very bullish and we are at this point on the verge of this signal failing. We seem to have returned to the light volume creep upward days again, so I would look for other confirmations for any sell signals. The uptrend has clearly resasserted itself in stocks.

I still have not taken any short stock or stock index positions during this recent move.

Sunday, March 07, 2010

Kick It To The Curb

COT DATA

For regular readers of this blog, this post is going to come as some what of a shock. After having used this data for so long and for the most part effectively, my advice now to people is throw this out the window with the bath water. If you look at the above chart of the Euro, I have marked off 5 times when the COT data was speaking, or was not when it would have been valuable.

First you have heavy selling right during a price liftoff. Then at #2 you actually have buying going on where it does give a good indication of a rally coming. Then at #3 you have heavy buying during a huge decline. At 4 you have very little selling during a rally in a downtrend, this is where it should be of most value. Heavy selling in an instance like this is what you would have wanted to see and it was not there. It did not tip you off to the resumption of a downtrend like it should have here. Now recently we have record buying during this price wipeout. Overall this data would have had you looking the wrong way most of the time during the last 2 years. I could put up chart after chart and the story is the same.

The only newsletter I subscribe to which I am not renewing, is Bullish Review by Steve Briese. He is probably the pre-eminent expert on reading the COT report. Larry Williams would be the only other person to discuss in levels of expertise with this data. Steve has just been wrong on virtually every single market for the last 2 years. Occasionally there has been a correct call, but the lion share of directional advice has been the opposite of where price has gone. I am not picking on him, I too have looked the wrong way time and time again due to this data. We were both trying to use something that is just no longer effective. You can't find any diamonds in this rough anymore, they just are not there.

At this point the bottom line is this, you just cannot stay with what does not work anymore. Whether it should or should not work is irrelevant. Theory does not pay the bills. What you use has to have an edge in the markets, if it does not you need to find something that does. There are subtle ways of using this that still work, some of which I will not just throw out here because they are proprietary. However, for the most part this data is of absolutely no use anymore. I think there are a couple of reasons why. First, too many people are using it now. We have seen this time and time again with many different things. Once they become widely known, the edges go away. Second, it is possible that there are some games going on with who gets classified where. This is the most likely reason in my mind as to why this data is now worthless.

The government is manipulating everything in our lives so there is no reason why they would not be doing it here also. I have no proof of this and I don't really care. The bottom line is that I may still mention this here and there during these exception periods, but for the most part this is no longer part of my market analysis repertiore. I cannot have as a lynch pin something with no edge whatsoever in forecasting future price movement. This data has cost me dearly in the last 2 years in missing moves I otherwise would have caught.

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My wife and I have been dog lovers for many years constantly moving up in the food chain. When we first met she had a Cairn terrier I named Louie after Louis Winthorp in the movie Trading Places. Since that time we have moved up into the world of Saint Bernards and we have found our calling in life. We live on a ranch with a large crew of Saint Bernards mostly from rescues with a few exceptions.

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